RubiK's Octopus

via Mark Thoma The photograph illustrates a fascinating post which really is about How to do cephalapod philosophy And while on the topic of molluscs an old favorite

When is a Bailout not a Bailout

Simon Wren Lewis wrote "It raises important issues about how to reinterpret a no bail out policy when OMT is possible,"

Heh indeed. The crucial credibility of the commitment to Calvinist virtue of the European Central Bank is entirely based on the distinction between lending money to a Treasury and buying bonds issued by that Treasury.

Buying bonds that no one else wants is an forbidden sinful bailout. Open market operations are standard central banking. Open markets being what they are, open market operations involve selling something or a price lower than the asking price of anyone else buying something for a price higher than any other bid. Roughly half of open market operations must involve buying a bond at a price no one else is willing to pay because markets work that way.

The fundamental central economically and morally crucial distinction is between buying a bond to drive up its price (drive down its yield) for good macroeconomic reasons or doing the exact same thing to bail out a Treasury.

This is a rule which can't be enforced without ESP. Even with ESP the central banker and the enforcer have to have a clear idea about a distinction based on words alone and not on desired outcomes. Also there is no enforcer.

The no bailout policy is like a rope made of sand except for the parts about ropes, sand and making.

Microcardiods Vs Magaurisoids

Well this is delicate. This humble blog is getting some traffice (from Mark Thoma as usual). It is unfortunate that I feel the need to blog wearing my tinfoil hat. I would like the reader to consider the civilizational struggle and ask if might be reasonable to entertain the possibility that our planet is the scene of a struggle for dominance between two alien civilizations. Now I understand claiming contact with one alien civilization is already full tinfoil hat so I guess I am going for tinfoil gloves too.

Of course one of the alien races would have to be the Megaurasoids characterized by large ears and completely mysterious political success. They seem to have landed in Indonesia in the 1960s and have already colonized the 2nd and third largest democracies.

I don't approve of colonialism, but we had been making a mess of things.

Of course this means I am not just a birther but a Birther alleging that Obama isn't just an alien in the legal sense but in the science fiction sense. I have seen photos of his birth certificate, but think back to 2002. Would you ever have imagined that a black guy named Barack Hussein Obama would become president through entirely terrestrial means ?

The second exemplar would, of course, have to be Joko Widowo who rose from a humble (allegedly earthling) background to be elected president of Indonesia. Hmm that extremely large important country no one ever thinks about again. Just look and tell me this is a coincidence

Hmm different hair. Slightly different eyes. The same ears. The same strange career path. I mean Widowo was elected president before he learned how terrestrials perform the strange task we call "pulling up our socks."

Look at the expressions. Both seem mildly pleased to find themselves in the White House. It's almost as if, after the distance they've travelled the distance from Hawaii or Indonesia to DC isn't any big deal.

Now I am confident that the megaurisoids have good intentions. Obviously, as mentioned above, their ability to get people to trust them is one of the ways in which they differ from humans.

Unfortunately we, and they, are not alone. There is clearly another group which landed in the frozen wastelands of Northern North America somewhere between Calgary and Milwauki. Again, try to tell me this is a coincidence with a straight face

I am, of course, almost the last to notice

MomJ at gardenweb has an wonderful example (think about it -- a political story so alarming and easily supported with photographic evidence that it is reported in a gardenweb forum).

Ms Observer Staff showed that even color film can not hide the resemblance

In five decades, at least the microcardiods have learned how to shave. The strange technology called the "razor" must be alien to them (probably because they were too tempted to try to kill each other with safety razors).

Bearing the Crown of Scorn

In "Who's the Most Humble? We Are!" Kevin Drum draws my attention to something Carly Fiorina said to which People for the American Way drew his attention.

"I do think it's worth saying," Fiorina declared, "that people of faith make better leaders because faith gives us humility"

Heh indeed. They also have a better sense of irony and self awareness.

Drum is not pleased.

He did write

"I've got nothing against organized religion. It provides an important part of life for a lot of people and does a lot of good charitable work. "

But then "" and wrote a devastating critique.

My rant volume goes up to 11

(his rant quality is much higher -- "always click the link" -- Kevin Drum).

My comment.

But even those of of us who don't believe that He technically Exists must be hypothetically eternally grateful to Jesus Christ for His willingness to suffer. I'm not talking about a bit of scourging and 3 hours on the cross. For such a benevolent and omniscient being the pain due to the humiliation of being associated with people like Fiorina must make crucifixion seem like a walk in the park.

OK enough snark now how about some science. I tried to check if Luntz was telling the truth. I know that socially undesired outcomes including teenage pregnancy are more likely in highly religious states. I also know what "ecological fallacy" means.

Of course I googled. It turns out that it is hard to get to other than obviously biased by googling [religious faith and teenage pregnancy]. The first few hits were all to heritage foundation sites. I chose to go to google scholar and found

http://www.sciencedirect.com/science/article/pii/S1054139X04004124

"Conclusion

Frequency of attendance and religious affiliation have little impact on sexual behaviors once intercourse occurs."

Which contradicts Luntz's claim because of the qualifiers "every single" and "all".

I also recall Case and Katz (1991) "The Company You Keep"

http://www.nber.org/papers/w3705

Which makes me feel old. The relevant bit of the abstract is "We find that family adult behaviors are strongly related to *analogous* youth behaviors. The links between the behavior of older family members and youths are important for criminal activity, drug and alcohol use, childbearing out of wedlock, schooling, and church attendance."

** mine.

The point is that, in regressions including the other adult behaviors, parents' church attendance is significantly related to youths' church attendance but not statistically significantly related to youths' criminal activity, drug and alcohol use, childbearing out of wedlock, or schooling.

Now this doesn't mean that organized religion has no effect -- to conclude that would be to reject the alternative hypothesis. It doesn't even mean that Luntz's claim is false -- he said "correlated" not "partially correlated," so he referred to simple regressions not multiple regressions.

I am sure Luntz knows about omitted variable bias. I am sure he is deliberately appealing to omitted variable bias to strengthen (and flatter) the faith of the audience.

I am as atheist as Kevin Drum is and as confident that organized religion is, on balance, a good thing*, but I am sure that Luntz's claim about the current level of empirical support for this view is based on the deliberately misleading use of the word "correlated".

* Yes I know that, according the the Gospels as written decades after his death, Jesus said "the truth shall set you free" and I just said I believe religious beliefs are are for the most part good false beliefs. I disagree with Jesus on the value of believing the truth.

What caused the Great Recession ?

A short comment on a shorter comment on Krugman's short comment on "The Big Short"

Comment FSP asked a question

FSP Los Angeles 41 minutes ago My question is this: Would the Lesser Depression have occurred if we did not have the "financial superstructure" of sub-prime backed securities, and just had instead the bursting of a housing bubble, without the implosion of those financial products adding to the problem? Or, can the two not be separated? I think at least a rough attempt to separate the two factors (housing bubble and financial superstructure) can be managed. Dean Baker has definitely claimed that the lesser depression would have occurred without the financial superstructure

The rough approach (Baker's approach) is to look at the much smaller past fluctuations in housing prices back before the RMBS CDO CDS superstructure was built and the subsequent fluctuations in GDP and employment. Baker argues that GDP behaved as one would forecast based on housing prices and regressions with pre-superstructure data.

Or you can ask if the financial crisis would have caused a lesser depression even if triggered by something other than a bubble bursting (a bubble in house price or some other price). Here the standard variable is the quality premium on corporate bonds (the spread between say a B corporate bond rate and AAA bonds or treasuries). This spiked in late 2008.

The time series of the two candidate explanatory variables are very very different. The lag, magnitude and duration of the effects on GDP can be estimated with 20th century data.

This is crude, but not as bad as my knowledge of the literature. I know of people (Del Negro & Schorfheide 2012 ) who look at quality premia and what happened next. I know of Baker who looks at house prices and what happened next. I (amazingly) don't know of anyone who has let the two variables into the same regression.

Yglesias on Abenomics

https://twitter.com/mattyglesias/status/666049859753918464 I have three responses. First I don't approve of changing the indicator between the time one makes a prediction and one looks at the data. Yglesias stressed expected inflation and actual inflation when declaring Abenomics a success.

Second in macro there aren't enough data points to just compare means for treated and untreated subjects -- there is one case of Abenomics treated Japan. Macro theory is unreliable, but imposing some theory on data is necessary. I think it is safe to assume that monetary policy affects employment through interest rates and the price level. Nominal interest rates were very low pre-Abe (also including the 10 year treasury rate = 0.713% the month before he was elected prime minister). The inflation rate remains extremely low. I don't see a path from changed monetary policy to improved employment. But I will check.

OK unemployment. rom the graph can you guess when Shinzo Abe was elected ? I can't (and with failing memory had to go to the Wikipedia but I'm man enough to admit it)

Answer he became prime minister after the DEcember 2012 elections. This was unsurprising after he was elected LDP party president September 26 2013. I see no hint of a change of economic regime September 2012 or December 2012 or at any date after 2008.

I don't see what checking the working age population growth rate has to do with Abenomics. It is determined by fertility 15 years ago and 65 years ago and, a tiny bit (but matters a lot for those uh involved) by the very low death rates of Japanese under 65. I guess that the idea is either that low working age population growth explains low GDP growth in spite of Abenomics or the tweet includes a typo and Yglesias meant to refer to the ratio of employment to the working age population.

That ratio has indeed increased dramatically. It began increasing before Abe but something new and different has been happening.

Stanley Greenberg Warns the GOP

I found Stanley Greenberg's article Why 2016 could be shattering for Republicans very interesting.

I was afraid to read it, because I don't want my hopes raised and then crushed. The current polls, for what they are worth, don't show a GOP cruising for a bruising. Greenberg's main claim is that John B. Judis and Ruy Teixeira were right way back in 2004 when they predicted an Emerging Democratic Majority.

I think the change based on 11 years of information is a greater stress on the beliefs of currently young Americans about religion and gays (also marijuana but Greenberg didn't mention that green stuff). They key paragraph is

... a new majority coalition of racial minorities, single women, millennials and seculars. Together, these groups formed 51 percent of the electorate in 2012, but our analysis of census survey data and exit poll projections indicates that they will comprise fully 63 percent in 2016. With these growing groups each supporting Hillary Clinton by more than 2 to 1 in today’s polls, it is fair to say that the United States has reached an electoral tipping point.

I think the growth of seculars is a bit of a surprise (they are people don't identify with any organized religion a majority of whom are neither atheist nor agnostic). But I think the key question is whether millennials will keep their current views which are similar to mine and very different from those of a majority of US citizens of my age. Another question is whether US Hispanic whites will continue to be a racial minority (as US Irish, Italians and Poles once were) or whether they will come to consider themselves part of roughly the same group as WASPs.

The point is not new (it probably wasn't new in 2004 either). To me the really interesting thing about the article is the name of the author. Greenberg has made a career studying the difficulties Democrats have have regaining the support of Reagan Democrats/blue collar ethnics/working class whites recently here. In this article, he argues that that group, which he studied and studied is no longer politically crucial. It is almost as if Mudcat Saunders wrote that he was convinced by Thomas Schaller's thesis in "Whistling Past Dixie" (I see it was published in January 2008 so Schaller sure didn't have to wait as long as Judis and Teixeira for confirmation).

I am not really surprised that Greenberg goes where the data lead him -- I have often been impressed by his research. But I am pleased. I think his narrow economic interests would have been well served by acting as the debater contra Judis and Teixeira. I don't think there is any advantage for public intellectuals gained by noting that the world has changed and that the things they said about the past are not true of the present. I think it helps to be predictable (I'm sure it helps them get on TV as bookers want to know what guests will say). Now Greenberg is in a different league than Sanders or the talking heads. Top Democrats will listen to him even after he has changed his emphasis. He wants them to win elections so he doesn't just want to take their campaign money, he wants to give them good advice. Still I am pleased (and displeased that I am surprised enough to be pleased).

Greenberg suggests that the new Republican and Conservative extremism is a reaction to the knowledge that people of my age race and gender won't control our shared country for long. This is the natural if uncharitable guess of what tea partiers really mean when they say they want to take our country back. Here it is important that, following party affiliation, voting intention, and issue polling, he considers key groups to be single women vs married women and men whether married or single (lots of tea partiers are women but few are single women). I know very few US conservatives and very few Republicans, but I am sure he is right. They talk and write about tipping points and some sort of doom. I am sure it is demographic doom.

I am out of touch (I am typing this in Rome). I am surprised that 15% of new marriages include spouses of different races (always counting Hispanic and Anglo white as different). I am shocked and appalled that only 68% of US adults think that "Sex between and unmarried man and woman" is "morally acceptable". I mean what the fuck do they expect single adults to do ? I guess it is impressive that this is only 5% more than the 63% who think gay sex is morally acceptable (still way too low but much higher than it was). I guess the dramatic news is that attitudes towards gay sex and premarital heterosex are similar, but I think it bears repeating: what the fuck ?

Second Comment on one Morning Plum Post by Greg Sargent

Extreme editing

GOP consultant Charlie Black explains what might stop Trump:

Black said he was briefed on the findings of two recent private focus groups of Trump supporters in Iowa and New Hampshire that showed these voters knew little about his policy views beyond immigration.

Members of the House Freedom Caucus are preparing a “Contract With America II” that would call for House votes in the first 100 days of 2016 on replacing Obamacare, overhauling entitlement programs such as Social Security and Medicare, and repealing the estate tax. [It] also calls for legislation to slash government regulations by 20 percent, cut corporate tax rates and expand offshore oil drilling.

That is one Republican argues that Trump will be stopped, because people don't know about his policy proposals, are thinking of only some issues, and responding to pollsters based on a general impression not policy issues and other Republicans propose cutting Social Security, Medicare and corporate tax rates. The case for Republican optimism is that people will learn the facts and decide whether to vote for Trump based on his policy proposals and then we can go back to getting the votes of people who want to keep the government's hands off of their Medicare and get back to fighting to cut Medicare.

As noted by many (including of course Paul Krugman) the establishment Republican case against fear of Trump and Carson is that they are obviously crazy. This is true, but so are all Republicans. They have to assume that voters will pay attention to Trump and Carson's policy proposals but not to the policy proposals of any other Republicans.

They are not only relying on voter ignorance but on selective voter ignorance. This leads me to conclude that the chance that they are guessing right and will win the next election is ... terrifyingly high.

Republican Stupidity Shocks me

"Worse than you can possibly imagine even taking into account that they are worse than you can possibly imagine" - Brad DeLong

"Members of the House Freedom Caucus are preparing a “Contract With America II” that ... calls for legislation to slash government regulations by 20 percent,"

That's not a bad proposal, because it isn't a proposal. What would it mean to cut regulations by 20% ? I suppose there might be some attempt at a definition, but I am sure they can't come up with a definition that makes sense.

Do they want to reduce the total pages of regulations by 20% ? That could be achieved by eliminating exceptions to regulations. How about reducing the number of separate regulations ? That could be achieved by reformatting the regulations without changing anything.

Would eliminating all regulation of sex, drugs, and abortion count ? Is this a joint GOP-NORML-NAMBLA coalition ?

In any case, such a law would have to grant enormous discretion to the executive branch.

The magic asterisk has magically moved from magic asterisk budgeting in which it is declared that some spending will be cut to magic asterisk deregulation in which it it declared that some regulations will be eliminated.

I already knew that the House Freedom Caucus are a post policy caucus, but they seem determined to remove all doubt. They can't be bothered to come up with extreme vague proposals. They demand a yoooge conservative shift but aren't willing to bother with details such as the difference between the EPA and the SEC.

I'm tempted to say this will finally save Congress by convincing these representatives' constituents that they are dangerous irresponsible crazy fools if election after election hadn't proven that there is no way to convince these representatives' constituents to vote for a Democrat.

Quote of the Day

QOTD "The Repubs haven’t updated their lies any over the last twenty years, but Hillary has gotten infinitely better at respondng to them." Anne Laurie

Downward nominal wage rigidity at wage growth of 2% per year

One great puzzle of the great recession is why extremely high unemployment caused such a small change in the rate of wage inflation. In the USA it fell only about 2% from the peak of wage inflation to the trough. Based on models popular in 2008, one would have forecast an actual decline in nominal wages.

The presumed explanation is that it is very hard for firms to actually cut dollar wages without infuriating workers. Micro data offers strong support for this view as there are a large number of individual wage changes of exactly zero as illustrated in this working paper by Mary C. Daly and Bart Hobijn (for the graph without the math look at Krugman).

To be clear the authors whose calculations are shown are Daly and Hobijn not your humble blogger.

Downward nominal rigidity also explains why unemployment is correlated with wage inflation not the acceleration of wage inflation (that is the change in wage inflation) or wage inflation minus expected price inflation. 21st century data look like the original Phillips scatter and like the expectations unaugmented Phillips curve (which was never actually taken seriously by more than one or two macro-economists in the 60s). As argued by Akerlof Dickens and Perry in 1996 (and informally by many others back in the even older days) if there are different markets for labor (different places, different industries, different occupations requiring different skills) then the relevant unemployment rate will be different for the different labor markets. With high unemployment and low expected inflation, many wage changes will be zero & stuck at the lower bound. higher constant not accelerating inflation relaxes this lower bound (which is that nominal wage changes can't be negative). This causes higher employment (and lower real wages). This gives a stable downward sloping Phillips curve (at least sloping down at very low inflation rates). The argument is important, because inflation also makes it easier for relative wages to adjust which (in the model) causes higher productive efficiency and average welfare.

I think the puzzle of why average wages continued to grow at a rate well above zero isn't completely solved. I can't imagine that in 2009 and 2010 there were many particular labor markets with enough demand to cause high wage increases (I'm sure the tails in the Daly and Hobijn figure are due to people losing good jobs and moving to bad ones or finding better jobs).

I think that the standard scheduled increase in wages with increased seniority might be binding too. If there is a contract (or an explicit contract) which says that wages increase 1% for every year of seniority, it could be infuriating for the firm to pay only last years nominal wage.

It is also true that with the high unemployment rate, the quit rate declined dramatically in 2009 and stayed low. This would make the promise of an increase of wages with seniority binding. Another way of putting it is downward nominal wage rigidity (with or without seniority based pay increases) means workers have wages higher than other employers want to pay (but are still worth employing for their current employer because of firm specific training). This means their wage is higher than the market wage. Higher and rising with seniority as promised.

I think this could explain the mass of wage increases around 3% to 4%. It isn't a spike like the spike at 0%, because different contracts have different provisions (and implicit contracts are vague). Or it could just be the normal normal.